Why Revenue Estimates Are Too Low

March 9, 2001

The estimated revenue loss from President Bush's tax cut plan is too high, says Bruce Bartlett. One reason is that the baseline revenue forecast is too low, meaning that the estimated impact of the tax cut on the surplus is too high.

Even without tax cuts, the baseline revenue forecasts from the Congressional Budget Office and the Office of Management and Budget are underestimating future revenue growth.

Historically, revenue growth has closely tracked nominal GDP growth, and since 1963, for every one percent rise in nominal Gross Domestic Product, revenues have risen by 1.04 percent.

But since the 1993 tax rate increase, federal revenues have increased 37 percent faster than GDP.

That is the reason why revenues as a share of GDP have risen from 17.6 percent in 1993 to 20.6 percent last year.

Because of the progressive nature of the tax code, as real incomes rise, workers are pushed into higher tax brackets. Thus, as long as there is real GDP growth, we will still get bracket creep.

If revenue forecasts prove to be too low, Congress can always raise taxes, says Bartlett. According to a recent Treasury Department study, there have been 15 major tax bills since 1980. Of these, 11 were tax increases. And of the 4 tax cuts, only the Economic Recovery Act of 1981 was significant.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), testimony before the House Budget Committee, March 8, 2001.